ethics+ +bus+risk

ENTERPRISE RISK MANAGEMENT

INTRODUCTION TO RISK

• Rapidly changing economy creates an expanding array of risks to be managed for viability and success of company

• Companies face task of managing risk exposures

• Challenges and demands of market, customer expectations, regulatory authorities, employees and shareholders present company with lots of risks


• Greater emphasis on successful identification, quantification, mitigation and control of risk

• Unforeseen developments that threaten the operations of a company are recognized early enough and business continuity plans put in place

• Info systems confronted with task of anticipating possible changes to environment


• Need to predict effects of undesired outcomes on company performance

• Risks related to market slump inflation etc to be analyzed for effects

• Attempts made to examine how risk affects various functional areas and how they impact others in a cause effect chain

• Critical factor for risk measurement is margin of fluctuation

DEFINING RISK

• OXFORD DICTIONARY DEFINES RISK AS DANGER OR POSSIBILITY OF LOSS OR DAMAGE

• IN BUSINESS RISK MGT COULD INVOLVE EITHER A DANGER OR AN OPPORTUNITY eg INVESTMENT IN SHARES WHERE FLUCTUATION ARE HIGHER IS A RISK WITH A GAIN OR A LOSS

DEFINING RISK

• PROJECT ESTIMATION AND SALES FORECASTING ARE RISKS

• RISK IS ALSO A REFLECTION OF INFO AVAILABLE TO TAKE GOOD DECISIONS

• DECISIONS MADE UNDER UNCERTAINTY OR CONDITIONS OF IGNORANCE ARE RISKIER THAN OTHERS

UNCERTAINTY

• Uncertainty is doubt about ability to achieve desired outcome

• Doubt can be produced by incomplete or incomprehensible data

• Uncertainty is the risk of an outcome not achieving its desired results or not happening at all

• Risk characteristics influence the level of uncertainty

LEVELS OF UNCERTAINTY

• None-outcome predicted with precision

• Objective uncertainty – outcomes identified probability known

• Subjective uncertainty-outcome identified probability unknown

• Exploration-Outcomes and probability unknown

WHAT IS ENTERPRISE RISK MGT

• ERM IS A PROCESS EFFECTED BY MGT APPLIED IN STRATEGY ACROSS THE COMPANY

• DESIGNED TO IDENTIFY POTENTIAL EVENTS THAT MAY ADVERSELY AFFECT THE COMPANY OPERATIONS AND MANAGE CUM CONTAIN THEM TO LIMIT THE ADVERSE EFFECTS

ERM DEFINITION BY COSO• COSO IS COMMITTEE OF SPONSORING ORGANIZATIONS• ERM IS AN ONGOING AND FLOWING PROCESS THRU THE ORG TO

THE STRATEGIC, TACTICAL AND OPERATIONAL PROCESSES• ERM DESIGNED TO IDENTIFY HOW POTENTIAL EVENTS IF THEY

OCCUR WILL AFFECT THE ORG• ERM ALSO ATTEMPTS TO STUDY THE CAUSE EFFECT CHAIN

RELATIONSHIP OF RISKS• RISK MGT SHOULD BE VIEWED AS A CORE COMPETENCY AND

SHOULD BE PART OF EVERYBODYS JOB• INVOLVES ALIGNMENT OF STRATEGIES PROCESSES SYSTEMS

PEOPLE AND INFO SO THAT EARLY WARNING BELLS ARE SOUNDED FOR RISKS , NOTICED AND ACTED UPON

• RISK = LIKELIHOOD * IMPACT• COST OF RISK = EXPECTED LOSS IF EVENT TAKES PLACE + COST

OF CAPITAL REQD TO COVER UNEXPECTED LOSS

ENTERPRISE RISK MGT

• ATTEMPTS TO MINIMIZE NEGATIVE EFFECTS OF RISK

• ENCOMPASSES -ALIGNING RISK AND STRATEGY -IMPROVING RISK RESPONSE -REDUCES OPERATIONAL SURPRISES BY ASSESSING ALL POSSIBLE RISKS ASSOCIATED WITH OPERATIONS WITH MITIGATION PLANS -IDENTIFYING AND MANAGING MULTIPLE AND CROSS ENTERPRISE RISKS

NEED FOR ERM

• CHANGING CUSTOMER NEEDS AND WANTS AND GAP IN UNDERSTANDING OR DELIVERY OF PRODUCT/SERVICE RESULTS IN MARKET AND REVENUE LOSSES

• ACCOUNTING AND REPORTING DIFFERENCES SUCH AS UNJUSTIFIED REVENUE RECOGNITION CONTROL WEAKNESSES

• CALL FOR STRONGER CORPORATE GOVERNANCE TO HAVE STRONGER INTERNAL CONTROLS

WHY ADOPT ERM PROGRAM

• DEALS EFFECTIVELY WITH POTENTIAL FUTURE EVENTS THAT CREATE UNCERTAINTY

• RESPOND IN A MANNER THAT REDUCES LIKELIHOOD OF DOWNSIDE OUTCOMES AND INCREASES THE LIKELYHOOD OF UPSIDE POTENTIAL

• IDENTIFIES AND HELPS DIFFERENTIATE RISKS AND OPPORTUNITIES ALONGWITH EVENTS THAT HAVE A NEGATIVE IMPACT WHICH REPRESENTS RISKS AND EVENTS WHICH HAVE A POSITIVE IMPACT WHICH REPRESENTS OPPORTUNITIES

• MANDATED BY CLAUSE 49 OF LISTINGS AGREEMENT BY SEBI AND SUCH LIST APPEARS IN MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS RISK CONTINUUM POLICY

• Research by PWC led to the definition of Business Risk Continuum Policy

• BRC highlights risk as 1.Opportunity 2.Uncertainty 3.Hazard

• All global companies deal with these 3 elements

RISK AS OPPORTUNITY COST

• Views risk as an opportunity cost

• Greater the risk greater the potential for loss

• Managing risk as an opportunity is a proactive function

RISK AS UNCERTAINTY

• Company can determine how to be proactive in preventing uncertain future events from negatively impacting company performance

• Management of uncertainty seeks to ensure that actual performance falls within defined range

• Uncertainty has strong defensive element because it involves sacrifice of opportunity to mitigate losses

RISK AS UNCERTAINTY

• Risk management seeks to reduce variance between anticipated outcomes and actual results

RISK AS HAZARD

• Risk viewed as a negative event including financial losses, loss of reputation

• Mitigation of degree of damage than can be caused if an event took place

DEVELOPMENT OF RISK POLICIES

• Opportunity perspective-Is there anyway opportunities can be identified by analyzing risks

• Uncertainty perspective-How can company meet its monthly targets and what are consequences of failure

• Hazard perspective-What are contingency plans should a negative event actually occur

IMPORTANCE OF RISK MGT

• Risk is inevitable if objective to be achieved

• Effective mgt of risk helps manage and improve performance contributing to -better service delivery -effective management of change -better contingency management

KEY AREAS TO BE ADDRESSED

• Corporate Governance related focus on managing risks

• Capability to achieve required outcome

• Need for improved reporting of risks

• Ability to understand onset of risk based crisis and preempt

OPERATIONAL RISKS AT RIL

• Rising cost of imported crude• Cost inflation in upstream activities• Cost inflation of steel• EPC contract price inflation• Shortage of rigs hampering exploration• Availability of manpower and equipment is

limited• not mentioned is what happens if govt

withdraws subsidy on retail price of fuel

OBJECTIVES OF RISK MGT

• Protection against financial consequences of accidental losses which are catastrophic in nature

• Minimization of total long term cost for all activities related to identification prevention and control of losses and other consequences

• Creation of a system of internal procedures providing a periodic assessment of fluctuating exposure to loss

RISK MGT FUNCTIONS

• Identification and measurement of risk• Selection of appropriate risk mgt technique for

risk resolution which includes assumption , reduction transfer etc

• Development and maintenance of risk information systems for timely and accurate recording of losses , claims and other risk related costs

• Benchmarking of risk performance against agreed performance mgt parameters

CRITICAL SUCCESS FACTORS OF RISK

• Ownership of risk mgt by senior mgt

• Risk policy clearly communicated and understood by all

• Mgt of risk closely linked to achievement of objectives especially 3rd party risks

• Adoption of risk framework that is repeatable

• Risk mgt should be embedded in processes and be monitored and reviewed

• Appropriate use of business continuity

ERM QUESTIONNAIRE• HAVE SENIOR MGT IDENTIFIED CATEGORIES AND TYPE OF

RISKS INHERENT IN THE COPMPANY • ARE THE EMPLOYEES AWARE OF VARIOUS CATEGORIES

AND TYPES OF RISKS IN THEIR AREA OF OPERATIONS• IS SENIOR MGT UPDATED ABOUT RISKS(SEPARATE

DECLARATION IN BALANCE SHEET) SUCH AS ECONOMIC, REGULATORY, MARKET CUSTOMER REQMNT CHANGES

• HOW ARE RISKS LIMITED• HOW DOES SENIOR MGT RESPOND TO RISKS THAT MAY

ARISE FROM CHANGES IN COMPETITIVE ENVIRONMENT OR FROM CHANGES IN TECHNOLOGY

• ARE ALL SUPPLY CHAIN RISKS COVERED

PRIMARY DRIVERS OF ERM

• CORPORATE GOVERNANCE REQUIREMENTS• GLOBALIZATION• EMERGING MARKETS• UNDERSTANDING OF THE THREE LEVELS OF RISK• REGULATORY AND SOCIETAL COMPLIANCES • COMPETITIVE ADVANTAGE• PRODUCT INNOVATION• TECHNOLOGY CURRENCY• INFORMATION REVOLUTION• BUSINESS PROCESS TRANSFORMATION

FLAVORS OF RISK

• PURE RISK-FOCUS ON BAD THINGS HAPPENING

• OPPORTUNITY/SPECULATIVE RISKS-FOCUS ON POSITIVE RISKS eg PROBABILITY THAT SHARE VALUE GOES UP OR DOLLAR VALUE WILL FALL FURTHER

• BOTH LOOK TOWARDS THE FUTURE AND UNCERTAIN OUTCOMES

CATEGORIES OF RISKS• STRATEGIC-ALIGN RISKS WITH LONG TERM GOALS,

STRATEGIES,VISION, MISSION,CRITICAL SUCCESS FACTORS.• TACTICAL-ALIGN RISKS WITH MEDIUM TERM PLANNING

ESPECIALLY MARKET RISKS,PRODUCT RISKS,COMPETENCY AND CAPACITY RISKS ETC

• OPERATIONAL-ALIGN RISKS WITH ACTIVITIES PERFORMED WHICH IF NOT CARRIED OUT TO EXPECTED OUTCOMES OR ARE UNABLE TO BE CARRIED OUT FORM PART OF THE OPERATIONAL RISK

• REPORTING-RELIABILITY OF INTERNAL CONTROLS AND REPORTING

• COMPLIANCE-COMPLIANCE TO LAWS AND REGULATIONS

CLASSIFICATION OF RISKS

• POLITICAL• ECONOMIC• BUSINESS OR OPERATIONAL• LEGAL• SERVICES• CONTRACTUAL• TECHNOLOGICAL• REPUTATIONAL• ENVIRONMENTAL RISKS • CUSTOMER RELATIONS• AGENCY NETWORK


• PRODUCT/SERVICE• ETHICAL CODE• INFORMATIONAL AND REPORTING• INTERNAL CONTROL• MARKET RISKS• FINANCIAL RISKS SUCH AS RUPEE

APPRECIATION• REGULATORY AND STATUTORY COMPLIANCE• TRANSACTIONAL BUSINESS CONTINUITY• COMPETITION • GEOGRAPHIC


• PROFESSIONAL• PROCESS OR ACTIVITY• HUMAN RESOURCES• CREDIT WORTHINESS• LIQUIDITY• DISASTER• CAPACITY AND CAPABILITY• OBSOLESCENCE• DATA INTEGRITY AND CURRENCY• FOREIGN CURRENCY• OIL PRICE HIKE

BUSINESS RISK

• BUSINESS MGT IS ABOUT MANAGING RISK DUE TO OPERATING ENVT WHICH IS FULL OF UNCERTAINTIES

• EVERY DECISION MADE HAS AN UNCERTAINTY OR RISK ABOUT IT AND HAS IMPLICATIONS POSITIVE OR NEGATIVE

• RISK CARRIES WITH IT AN OPPORTUNITY FOR GAIN OR LOSS

OPERATIONAL RISK

• RISKS ARISING OUT OF OPERATIONAL PROCESSES NOT DELIVERING THE EXPECTED/PLANNED OUTCOMES RESULTING IN NEGATIVE IMPACT FOR THE COMPANY

• IMPACT COULD BE FINANCIAL,SAFETY RELATED,TECHNICAL OR REPUTATIONAL

SOURCES OF OPERATIONAL RISK

• LACK OF WELL ESTABLISHED PROCEDURES AND CONTROLS

• POORLY TRAINED OR ILL MOTIVATED WORK FORCE

• INCOMPETENCE• INATTENTION OR LACK OF ATTITUDE• FATIGUE,MONOTONY,BOREDOM• POOR MAINTENANCE OR OBSOLETE

MACHINES

MARKET RISK

• ALL BUSINESSES THAT SELL GOODS AND SERVICES ARE CONCERNED WITH MARKET RISK

• MARKET RISK IS ALWAYS ASSOCIATED WITH SALE OF PRODUCTS ESPECIALLY WITH NEW PRODUCT DEVELOPMENT

FINANCIAL RISKS

• RISKS ARISING OUT OF UNPROFITABLE OPERATIONS OR LACK OF SALES OR RISING OPERATIONAL COSTS OR MOUNTING ACCOUNTS RECEIVABLE

PROJECT RISK

• PROJECT MGT PRINCIPLES INVOLVE GETTING THE JOB DONE IN TIME, WITHIN BUDGET, ACCORDING TO SPECIFICATIONS LEADING TO CUSTOMER SATISFACTION

• PROJECT MGT ADDRESSES THREAT OF PROJECT DELIVERABLES

REGULATORY RISKS

• ALL BUSINESS HAVE REGULATIONS WHICH ARE REGULATED AT LOCAL NATIONAL OR INTERNATIONAL LEVELS

• REGULATORY RISKS ARE RISKS BORNE OUT OF DELIBERATE OR INADVERTENT VIOLATION OF LAWS AND REGULATIONS AND THE ENSUEING IMPACT

ENVIRONMENTAL RISKS

• PHYSICAL-GEOLOGICAL AND CLIMATIC RISKS FROM PHYSICAL ENVT eg FOR GROWING FRUITS

• SOCIAL-CUSTOMERS CHANGING TASTES AND PREFERENCES CHANGING VALUE SYSTEMS

• POLITICAL-CHANGES IN GOVERNMENTS OR LAWS

ENVIRONMENTAL RISKS

• LEGAL-RISK OF VIOLATION OF LAWS• ECONOMIC-INFLUENCE OF GLOBAL

ECONOMY OR NATIONAL ECONOMY• OPERATIONAL-MANNER IN WHICH

ORGANIZATION WORKS• COGNITIVE-ENVIRONMENT OF THE

MIND.MGRS KNOWLEDGE MAY BE INFLUENCED BY ABSENCE OR INNADEQUATE INFO OR MENTAL INADEQUACY TO COMPREHEND

RISK IN NEW PRODUCT DEVELOPMENT

• MARKET RISK-IS THERE A MKT DEMAND FOR PRODUCT

• TECHNICAL RISK-ARE WE TECHNICALLY ABLE TO DESIGN AND BUILD WORKING MODEL FOR PRODUCT

• OPERATIONAL RISK-WILL WE BE ABLE TO PRODUCE THE PRODUCT EFFICIENTLY ON A LARGE SCALE

RISKS IN NEW PRODUCT DEVELOPMENT

• FINANCIAL-WILL THE NEW PRODUCT BE PROFITABLE

• REGULATORY-WILL THE NEW PRODUCT BE IN COMPLIANCE WITH REGULATIONS ESPECIALLY PHARMA

TYPES OF RISKS

• IDENTIFIED RISKS-RISKS HAVE BEEN DETERMINED FOR EXISTING PROCESSES USING ANALYTICAL TOOLS BUT NOT VETTED FOR FUTURE OPERATIVE CONFIGURATION

• UNIDENTIFIED RISK-RISK NOT YET IDENTIFIED• ACCEPTABLE RISK-PART OF IDENTIFIED RISK THAT

IS ALLOWED TO CONTINUE AFTER CONTROLS ARE APPLIED. RISK IS ACCEPTABLE WHEN FURTHER EFFORTS TO REDUCE WILL RESULT IN DEGRADATION

• RESIDUAL RISK-PORTION OF RISK THAT REMAINS AFTER EFFORTS HAVE BEEN EMPLOYED . RESIDUAL RISK IS ACCEPTABLE RISK + UNIDENTIFIED RISK

ACTIVITIES IN RISK MGT

• Defining scope of operational risk mgt eg market risk mgt

• Defining and putting in place requisite roles and responsibilities and reporting structures

• Identifying categories of risks, prioratising ,mapping them onto business processes to understand impact

ACTIVITIES IN RISK MGT

• Attributing root cause of occurrence to each risk and estimating the type of loss and financial impacts

• Working with business to assign ownership for each risk

• Assisting business to identify risks and implement requisite controls and avoidance procedures which involve measures methods tools

EXPOSURES TO RISK

• PHYSICAL ASSET EXPOSURE-VEHICLES,BUILDINGS

• FINANCIAL ASSET EXPOSURE-MONEY,INVESTMENTS,RECEIVABLES

• HUMAN ASSET EXPOSURE-EMPLOYEES,DIRECTOR LIABILITY

• LEGAL LIABILITY EXPOSURE-PRODUCT LIABILITY,EMPLOYEE DISCRIMINATION,ENVT POLLUTION etc

EXPOSURES TO RISK

• MORAL LIABILITY EXPOSURES-ETHICAL AND VALUE BASED COMMITMENTS AND OBLIGATIONS eg ABC IN BLR MISS WORLD FOR SPASTICS SOCIETY

PHYSICAL ASSET EXPOSURES

• PROPERTY TYPE-PERSONAL,REAL (LAND,BUILDING);FIXED,MOVABLE

• LOSS/GAIN TYPE

• CAUSE OF GAIN/LOSS TYPE

FINANCIAL ASSET EXPOSURES

• FINANCIAL ASSETS HAVE A VALUE DETERMINED AT ISSUANCE THAT -MAY VARY DURING ASSET LIFETIME -WILL BE INFLUENCED BY RANGE OF OUTSIDE FACTORS SUCH AS ECONOMY AND GOVT POLICIES

HUMAN ASSET EXPOSURE

• ALL STAKEHOLDERS ARE HUMAN ASSETS

• KEY EXPOSURES CAN BE -PREMATURE DEATH -DISABILITY/POOR HEALTH -OLD AGE/RETIREMENT -UNEMPLOYMENT -POVERTY -PRODUCTIVITY

COST OF RISK

• Measure of the impact of a risk

• Reflects the direct cost of losses sustained in a period and indirect costs arising from risks (intangible costs, misallocation of resources, cost of risk reducing measures)

• Cost of risk = Risk mgt dept payroll + Risk control expenditure + insurance + uninsured losses + risk mgt service vendor fees

ERM FRAMEWORKS

• ERM FRAMEWORKS DESCRIBE A METHODOLOGY FOR DEFINING MEASURING AND CONTROLLING/ELIMINATING RISKS

• FRAMEWORKS CONSIDER ACTIVITIES AT ALL LEVELS -ENTERPRISE LEVEL -SUBSIDIARY LEVEL -DIVISION LEVEL -LOCATION LEVEL -DEPARTMENT LEVEL -PROCESS LEVEL -EMPLOYEE LEVEL

ERM FRAMEWORKS

• IDENTIFY RISKS• EVALUATE THE RISKS• SET ACCEPTABLE LEVELS OF RISK• IDENTIFY SUITABLE RESPONSE TO RISK• IMPLEMENT RESPONSES• GAIN ASSURANCE ABOUT EFFECTIVENESS• REVIEW

VARIOUS ERM FRAMEWORKS

• TURNBULL GUIDANCE• KING 2 REPORT• RISK MGT STDS BY FEDERATION

EUROPEAN RISK MGT ASSOCIATION• AUSTRALIA/NZ STD 4360-RISK MGT• COSO ERM INTEGRATED FRAMEWORK• INST OF MGT ACCT-ASSESSING INTERNAL

CONTROL ON FINANCIAL REPORTING• BASEL 2• STANDARDS AND POOR ERM

COSO ERM INTEGRATED FRAMEWORK

• EVENT IDENTIFICATION

• INFORMATION ACCESS AND ANALYSIS

• RISK ASSESSMENT

• RISK CONTROL ACTIVITIES

• RISK CONTROL MONITORING

METHODOLOGY OF COSO ERM INTEGRATED FRAMEWORK

• SET STRATEGY AND OBJECTIVES -IDENTIFIERS -ASSESS RISKS THRU RISK MODELING -TREAT RISKS -CONTROL RISKS -COMMUNICATE AND MONITOR

ERM AND CORPORATE GOVERNANCE

• ERM TIES IN CLOSELY WITH CORPORATE GOVERNANCE BY -IMPROVING INFO FLOW BETWEEN COMPANY AND BOARD REGARDING RISKS -INITIATING DISCUSSIONS OF STRATEGIES FOR RISK CONTAINMENT -MONITORING KEY RISKS -IDENTIFYING ACCEPTABLE RISKS -FOCUSING ON IDENTIFIED RISKS -IMPROVING DISCLOSURES TO STAKEHOLDERS ABOUT RISKS -KNOWING WHICH PROCESSES ARE AT HIGH RISK -LISTING OF RISKS STATUTORY IN MGT DISCUSSION AND ANALYSIS SECTION OF BALANCE SHEET

CRITICAL SUCCESS FACTORS FOR ERM

• OWNERSHIP OF ERM PROCESS BY SENIOR MGT• CLEAR RISK MGT POLICY COMMUNICATED TO ALL

EMPLOYEES• EXISTENCE AND ADOPTION OF A FRAMEWORK

FOR RISK MGT THAT IS REPEATABLE • RISK MGT ACTIVITY IMBEDDED IN PROCESSES• MGT OF RISK CLOSELY LINKED TO ACHIEVEMENT

OF OBJECTIVES• RISKS ASSOCIATED WITH WORKING WITH OUTSIDE

AGENCIES ASSESSED AND CONTROLLED• APPROPRIATE USAGE OF BUSINESS CONTINUITY

PLANNING

IMPEDIMENTS TO ERM

• OVER OPTIMISM OR LACK OF UNDERSTANDING OF PROCESS INTRICACIES AND DYNAMICS

• CHANGE MGT OPPOSITION

• LACK OF IDENTIFICATION OF SOFT RISKS

BENEFITS OF ERM

• BETTER INFORMED DECISIONS• INCREASED CERTAINTY OF OUTCOMES• EFFECTIVE CHANGE MGT• REDUCED FRAUDS• INCREASED MGT ACCOUNTABILITY• SMOOTHER GOVERNANCE PRACTICES• ABILITY TO MEET STRATEGIC GOALS• REDUCED OPERATIONAL, TACTICAL AND

STRATEGIC RISKS

PROCESS RISK MANAGEMENT

PROCESS RISK MGT

• Risk is possibility of desired results not achieved• For business decisions risk is events that have

strong effects on overall performance• Performance monitoring systems have early

warning systems for risks or bottlenecks• Risks categorized as financial (liquidity,

profitability ),or by origin (recession ,market changes) or by position in value chain

PROCESS RISK MGT• RISK INVOLVES ELEMENT OF UNCERTAINTY• IMPACT OF RISK IS A VERY SERIOUS CONSIDERATION• RISK HAS TWO PRIMARY COMPONENTS

-PROBABILITY OF OCCURRENCE OF EVENT -IMPACT OF EVENT OCCURRING IN MONEY TERMS

• RISK IS A FUNCTION OF LIKELIHOOD AND IMPACT• RISK CONSTITUTES A LACK OF KNOWLEDGE OF FUTURE

EVENTS(OUTCOMES)• FAVORABLE OUTCOMES ARE CALLED OPPORETUNITIES AND

UNFAVORABLE RISKS • CAUSE OF RISK ITSELF IS A RISK AND IS CALLED A HAZARD• IN THIS CASE RISK IS A FUNCTION OF HAZARD AND

SAFEGUARD• RISK INCREASES WITH HAZARD BUT DECREASES WITH

SAFEGUARD

MOTIVES FOR PRACTISING RISK MGT

• MANAGING RISK OF STAKEHOLDERS• COMPLYING WITH REQUIREMENTS OF

REGULATORS,FI AND OTHERS WITH INTEREST IN THE FIRM

• MANAGING OR AVOIDING COSTS ASSOCIATED WITH BANKRUPTCY

• ASSAYING MORAL AND ETHICAL CONCERNS• MODERATE THE IMPACT OF RISKS AND

UNCERTAINTY IN DAILY TASKS

STRUCTURE OF RISK MGT

• TIME-DETERMINE THE NECESSARY/ AVAILABLE CAPACITY FOR IMPLEMENTING RISK MGT AND DECIDE AT WHAT MOMENTS RISKS WILL BE ASSESSED

• MONEY-DETERMINE THE COSTS AND YIELDS OF RISK MGT AND ASCERTAIN WHETHER COSTSFIT WITHIN BUDGET

• QUALITY-DETERMINE THE QUALITY CHARACTERISTICS REQD OF RISK MGT AND HOW TO GUARANTEE QLTY CHARACTERISTICS

• INFORMATION-DETERMINE MANNER IN WHICH RISKS ARE TO BE REPORTED AND RECORDED

• ORGANIZATION-ORGANIZATION STRUCTURE REQD TO IMPLEMENT RISK MGT

PROCESS RISK MGT

• PLAN FOR RISK• RISK ASSESSMENT THROUGH

IDENTIFICATION AND ANALYSIS• RISK ASSESSMENT THROUGH IMPACTS• RISK ASSESSMENT THROUGH RISK

HANDLING STRATEGIES• RISK RESOLUTION THROUGH

MONITORING AND CONTROLLING RISK

PROCESS RISK PLANNING

• PROCESS OF DEVELOPING AND DOCUMENTING AN ORGANIZED COMPREHENSIVE STRATEGY FOR IDENTIFYING AND TRACKING RISK ISSUES,DEVELOPING RISK HANDLING PLANS , PERFORMING CONTINUOUS RISK ASSESSMENTS TO DETERMINE HOW RISKS HAVE CHANGED

• PREPARE TO MANAGE RISKS CONSCIOUSLY• CAREFUL RISK PLANNING

RISK IDENTIFICATION AND ANALYSIS

• PROCESS INVOLVES IDENTIFYING AND ANALYSING AREAS AND CRITICAL PROCESS RISKS TO INCREASE THE LIKELIHOOD OF MEETING COST PERFORMANCE AND SCHEDULE OBJECTIVES

• RISK IDENTIFICATION IS THE PROCESS OF IDENTIFYING AND DOCUMENTING THE RISK

• RISK ANALYSIS IS THE PROCESS OF EXAMINING IDENTIFIED RISK ISSUES TO REFINE THE RISK DESCRIPTION,ISOLATE THE CAUSE AND DETERMINE THE EFFECTS

RISK IDENTIFICATION EFFORTS

• LOOKS FOR POSSIBLE SOURCES OF TROUBLE IN ORG

• ADDRESSES QUESTIONS LIKE HOW MIGHT OUR OPS FAIL? WHAT WEAKNESSES CAN WE FIND IN OUR INTERNAL CONTROL SYSTEMS?WILL WE BE ABLE TO DELIVER GOODS BY THE CONTRACTED DATE

RISK IDENTIFICATION EFFORTS

• IDENTIFY ALL POTENTIAL RISK ISSUES• OBJECTIVE OR SUBJECTIVE SOURCES• OBJECTIVE

-RECORDED EXPERIENCES FROM PAST PROJECTS IN TERMS OF LEASONS LEARNT, CURRENT PERFORMANCE DATA

• SUBJECTIVE -EXPERIENCE BASED UPON KNOWLEDGEABLE EXPERTS

SOURCES OF RISK

• INTERNAL-RISKS ORIGINATING WITHIN PROJECT . TWO MAIN CATEGORIES OF INTERNAL RISK ARE MARKET AND TECHNICAL

• EXTERNAL-RISKS INCLUDE RISKS EMANATING FROM OUTSIDE THE PROJECT. Eg COMPETITORS ACTIONS, CUSTOMER BEHAVIOUR, SUPPLIER RELATIONS, LABOR AVAILABILITY,SUB CONTRACTOR PERFORMANCE

RISK ANALYSIS

• DETERMINE THE OBJECTIVE

• IDENTIFY THE RISKS

• DETERMINE THE MOST IMPORTANT RISKS

• IDENTIFY THE CONTROL MEASURES

• SELECT CONTROL MEASURES

RISK ANALYSIS

• BEGINS WITH DETAILED STUDY OF RISK ISSUES IDENTIFIED

• OBJECTIVE IS TO GATHER INFO ABOUT RISK ISSUES

• RISK ANALYSIS DONE ON FOLLOWING TOPICS -COST EVALUATION -SCHEDULE EVALUATION -TECHNICAL EVALUATION

TOOLS IN RISK ANALYSIS

• LIFE CYCLE COST ANALYSIS• MONTE CARLO SIMULATION• IMPACT ANALYSIS• PROBABILITY ANALYSIS• DECISION ANALYSIS• WBS SIMULATION• TECHNOLOGY TRENDING• TOTAL RISK ASSESSING COST ANALYSIS

USAGE OF RISK ANALYSIS

• ACHIEVE MORE CONTROL ON ACTIVITIES

• IMPROVE SETTING OF PRIORITIES

• TAKE WELL FOUNDED DECISIONS

RISK IMPACT

• DETERMINE CONSEQUENCES ASSOCIATED WITH OCCURRENCE THROUGH QUANTITATIVE ANALYSIS

LEVELS OF RISK

• HIGH RISK – SUBSEQUENTIAL IMPACT ON COST SCHEDULE HIGH

• MODERATE RISK – SOME IMPACT ON COST SCHEDULE

• LOW RISK – MINIMAL IMPACT ON COST SCHEDULE

• RISK RATINGS GIVEN

• RATING = PROBABILITY * IMPACT

RISK PROBABILITY

• 1 HIGHLY UNLIKELY CHANCES

• 2 SLIGHT CHANCES

• 3 LIKELY CHANCES

• 4 HIGHLY LIKELY CHANCES

• 5 ALMOST CERTAIN CHANCES

RISK IMPACT

• 5 HUGE-DISASTROUS BUSINESS EFFECTS DIFFICULT TO RECOVER

• 4 LARGE-SIZEABLE IMPACT ON BUSINESS BUT POSSIBLE TO RECOVER

• 3 MEDIUM-MODERATE EFFECT ON BUSINESS

• 2 LOW-MINIMAL IMPACT ON BUSINESS• 1 NO EFFECT ON BUSINESS

RISK HANDLING STRATEGIES

• IDENTIFIES EVALUATES SELECTS AND IMPLEMENTS OPTIONS INORDER TO SET RISK AT ACCEPTABLE LEVELS

• INCLUDES SPECIFICS ON WHAT SHOULD BE DONE , WHEN IT SHOULD BE ACCOMPLISHED , WHO IS RESPONSIBLE, AND ASSOCIATED COSTS AND SCHEDULE

• RISK HANDLING OPTIONS INCLUDE ACCEPTANCE,AVOIDANCE, MITIGATION, LIMIT,PREVENTION,SHARING AND TRANSFER

RISK HANDLING OPTIONS

• ACCEPTANCE/RETENTION = RISK EXISTS AWARE OF CONSEQUENCES WILLING TO WAIT AND SEE WHAT HAPPENS.ACCEPT THE RISK AND IMPACT

• AVOIDANCE = WILL NOT ACCEPT THE RISK AND HENCE ACTIVITY NOT DONE

• RISK MITIGATION/CONTROL = TAKE REQD MEASURES TO CONTROL RISK BY DEVELOPING CONTINGENCY PLANS

• RISK LIMIT = PROCEED STEP BY STEP• RISK TRANSFER = TRANSFER RISK TO OTHERS

eg INSURANCE

RISK HANDLING OPTIONS

• PREVENTION = COUNTER MEASURES PUT IN PLACE TO STOP THREAT OR PROBLEM FROM ARISING OR TO PREVENT IT FROM HAVING IMPACT ON BUSINESS

• SHARING = SEEK PARTNERSHIP TO SHARE RISK

CHOICE OF TRANSFER OR RETENTION

• DECISION TO TANSFER OR RETAIN RISK GOVERNED BY FIVE FACTORS -DEGREE OF CONTROL OVER RISK -COST OF FINANCING OPTIONS -QUALITY/VALUE OF SERVICES -OPPORTUNITY COST -TAXATION ISSUES

RISK TRANSFER THROUGH INSURANCE

• DIRECT PROPERTY LOSSES• INDIRECT PROPERTY LOSSES-LOSS OF

INCOME TIED TO INTURRUPTED BUSINESS OPERATIONS AND COSTS ASSOCIATED WITH IMPLEMENTATION OF DISASTER RECOVERY PROCEDURES

• LIABILITY-DEALING WITH LAWSUITS FROM PUBLIC FOR PERSONAL INJURY OR PROPERTY DAMAGE

RISK TRANSFER THROUGH INSURANCE

• PERSONNEL RELATED LOSSES-EXPENSES INCURRED IN RELATION TO INJURIES SUFFERED BY EMPLOYEES ON JOB

• PERFORMANCE RELATED LOSSES-LOSS OF INCOME WHEN A JOB IS NOT COMPLETED

MEASURES FOR RISK HANDLING

• TYPE OF MSR EXAMPLE - AVOIDANCE -AVD INVEST IN ORG -SHARE -PARTNERSHIP - MITIGATE -HIGH MARK UPS - LIMITATION -UPPER LIMIT ACR - ACCEPT -NEW PROD LANCH - TRANSFER -INSURANCE - PREVENT -SAFETY PROCESS

RISK MONITORING

• MONITOR EVENTS TO CHECK IF ANY UNTOWARD EVENTS ARE BUILDING UP AND NEED TO BE HANDLED BEFORE THEY BECOME A CRISIS

• MONITORING EFFORT IDENTIFIES PROBLEMS AND LISTS STEPS TO BE TAKEN TO CONTROL THEM

RISK MONITORING

• PROCESS THAT SYSTEMATICALLY TRACKS AND EVALUATES PERFORMANCE OF RISK HANDLING ACTIONS AGAINST ESTABLISHED METRICS THROUGHOUT THE ACQUISITION PROCESS

RISK CONTROL

• STRATEGY THAT SEEKS TO AVOID,PREVENT,REDUCE OR ELIMINATE RISK AND UNCERTAINTY

• INCLUDES MEASURES TAKEN TO INCREASE UPSIDE POTENTIAL AND TO INCREASE PROBABILITY OF FAVORABLE OUTCOMES

RISK FINANCING

• ENABLES ORG TO REIMBURSE LOSSES THAT OCCUR AND FUND PROGRAMS TO REDUCE RISK

• FINANCING RISK CAN ENTAIL TRANSFER,MITIGATION,LIMITATION

RISK CHAIN

• LOSSES OR GAINS CAN BE LINKED TO A SET OF INTER LOCKING ELEMENTS CALLED RISK CHAIN

• LINKS ARE AS FOLLOWS

RISK CHAIN LINKS

• ENVIRONMENT LINK-REFERS TO GENERAL CONDITIONS IN WHICH LOSS OR GAIN EVENTS OCCUR

• HAZARD/RISK FACTOR LINK-WITHIN ENVTS CERTAIN CONDITIONS ELEVATE CHANCES OF LOSS OR GAIN OR POTENTIAL MAGNITUDE OF LOSS OR GAIN

• EXPOSURE LINK-REFERS TO NATURE AND CONDITION OF EXPOSURE +/-

RISK CHAIN LINKS

• PERIL/OPPORTUNITY LINK-REFERS TO PROCESS THROUGH WHICH THE INTERACTION OF HAZARD/RISK FACTOR AND EXPOSURE PRODUCES LOSS OR GAIN

• OUTCOME LINK-REFERS TO DIRECT AND MEASURABLE IMPAQCT OF HAZARD/RISK FACTOR ON EXPOSURE

• CONSEQUENCE LINK-REFERS TO LONG TERM EFFECT OF THE LOSS

FUNCTIONAL AREAWISE RISK

• R & D - Late replacement of old products• SALES - Sales decline,price crash• PROCUREMENT - Supplier problems• PRODUCTION - Below expectation output• SHIPPING - Incorrect,late deliveries• CUST.SERVICE – Warranty issues,recalls• FINANCIALS – Share value decline,liquidity risk• PERSONNEL – Severance cost,low productivity

RISKS ARISING FROM LEGAL AREAS

• OPERATIONAL RISK MGT ASSERTS THAT AN IMPORTANT RISK ARISES FROM CONTRACTS,OBLIGATIONS,COMMITMENTS AND AGREEMENTS

• NEED TO ASSESS RISK AT TIME OF DRAFTING OF TERMS AND ADDRESS THEM TO SAVE THE BLUSHES LATER ON

PROJECT STEPS FOR RISK IMPLEMENTATION

• INITIATIVE PHASE-DETERMINE WHY RISK MGT IS REQD AND WHAT SHOULD BE ACCOMPLISHED

• DEFINITION PHASE-DETERMINE WHAT REQMNTS SHOULD BE SATISFIED BY RISK MGT AND IF THEY ARE ATTAINABLE

• DESIGN PHASE-DETERMINE THE FORM THAT RISK MGT WILL TAKE

• PREPARATORY PHASE-PREPARE STRATEGY FOR EFFECTIVE IMPLEMENTATN

• REALIZATION PHASE-IMPLEMENT RISK MGT AND CREATE FOLLOW UP PLANS

• FOLLOWUP PHASE-USE/APPLY RISK MGT AND ADAPT RISK MGT `1TO PROCESSES

CSF IN IMPLEMENTATION OF RISK MGT

• FORMULATION OF CLEAR OBJECTIVES-WHAT IS TO BE ACHIEVED THRU RISK ANALYSIS

• ESPOUSING NEED OF RISK MGT THROUGHOUT ORGANIZATION

• ACQUIRING CAPABILITY TO HANDLE STRATEGIC,TACTICAL AND OPERATIONAL RISKS

• DEVISING RISK ANALYSIS AND CONTROL MECHANISMS FOR ABOVE RISK CATEGORIES

• INCORPORATING RISK MGT INTO EXISTING WORK METHODS

STRENGTH OF RISK MGT

• SURFACE RISK EVENTS THAT OTHERWISE WOULD NOT BE RECOGNIZED.

• CONSEQUENTLY THEY REDUCE THE NUMBER OF SHOCKS MGRS ENCOUNTER IN THEIR WORK EFFORT

• ENABLES MGRS TO CALCULATE THE CONSEQUENCES OF UNTOWARD EVENTS .IMPACT OF RISK INFO HELPS IN DECISION MAKING

STRENGTH OF RISK MGT

• GUIDANCE ON WHAT STEPS TO TAKE TO REDUCE LIKELIHOOD OF UNTOWARD EVENTS ARISING AND WHEN THEY ARISE WHAT STEPS THEY CAN TAKE TO MINIMIZE NEGATIVE IMPACT

WEAKNESS OF RISK MGT

• DO NOT PREDICT FUTURE EVENTS WITH CONFIDENCE AS PATTERN OF OCCURRENCE IS NOT STUDIED

ENTERPRISE RISKS

FOR

PRESIDENT SYSTEMS

ORGANIZATIONAL OPERATIONAL RISKS

• Cloning of our products by smaller companies in the unorganized sector

• Periodic steep increase in steel and component prices leading to reduced manufacturing contribution

• Introduction of new products which may not succeed in the marketplace

• Inadequate understanding of exact market potential , requirement of such markets and wallet share of competition

• Non competitive pricing resulting in reduced product sales

• Risk of collaborator or principal quitting business


• Lack of adequate technical or marketing support from principals

• Diversification into new segments without core competence and risk assessments

• Excessively long sales

• Job responsibilities in process not clearly defined/understood

• Inadequate closures for qtr and non receipt of acr for period leading to enhanced working capital requirement and liquidity crunch

• Excessive discounting leading to OA’s being executed at uneconomic prices

• Need to assess operational risks for non standard OA


• Inadequate closures for qtr and non receipt of acr for period leading to enhanced working capital requirement and liquidity crunch

• Excessive discounting leading to OA’s being executed at uneconomic prices

• Need to assess operational risks for non standard OA

• Supply chain partner competency may not be upto the requirement• Attrition of core competent people from mfg or R&D centres leading

to loss of capabilities• Business continuity planning for operations and people needs to be

planned


• Supply chain partner competency may not be upto the requirement

• Attrition of core competent people from mfg or R&D centres leading to loss of capabilities

• Business continuity planning for operations and people needs to be planned

• Unavailability of data related to quality and mfg contribution from it systems leading to incorrect assumptions

• True capacity of factories not known in terms of throughput in number of units

• Inadequate information from it systems leading to deficiency in management by fact


• Risks of increased set up and batch execution times for non std products leading to ineffective capacity utilization

• Inadequate understanding of complexity of mfg issues and lack of competence to mfg such items

• Under costing of items leading to mfg losses or less margins

• Compliance to international requirements such as sa 8000 not evident

• Unprofitable partnerships with principals

• Industrial espionage

• Presence and occurrence of operational risks

MANUFACTURING OPERATIONAL RISKS

• Correctness of cost estimates

• Underestimation of complexity of mfg intricacies

• Escalation of rm prices and their effect on OA mfg contribution

• Oper exp inflation leading to lowered mfg contribution

• Supplier insolvency

• Availability of raw material

• Supplier and outsourcer process and qlty capability

• Other operational risks incl business continuity planning in the event of force majeure

MANUFACTURING OPERATIONAL RISKS

• Worker strikes or go slow tactics

• Presence of undetected technical risks

• Faulty designs

• Unexpected machine breakdowns or operative trouble

• Power outages

CONTRACT MANUFACTURING SBU OPERATIONAL RISKS• Fixed price mfg contracts valid for long periods which do not factor

price escalations

• Competition from low cost manufacturers

• Quality issues in delivery

• Delayed or short shipment

• Operational risks from outsourced or procurement processes

• Customer attrition to competition

TPD SBU OPERATIONAL RISKS

• Lack of pre sales support from principals

• Closure of principal due to force majeure or other reasons

• Withdrawal of product support or from catalog by principals without provision for extended support for products currently in the market

• Indifferent spares coverage

• Product transfer prices not commensurate with the purchasing power of the indian customer

• Product performance and reliability not as per the stated claims or customer expectations

• Quality issues in shipped items

STANDARD ENCLOSURES SBU OPERATIONAL RISKS

• Under estimation of costs

• Rm or operational cost inflation

• Competition from low cost manufacturers

• Quality issues in delivery

• Delayed or short shipment

• Operational risks from outsourced or procurement processes

• Customer attrition to competition

• Under estimation of complexity of mfg processes required to produce non std product

RISKS IN PROCUREMENT

• Capability capacity competence not matching requirements

• Delayed deliveries

• Quality not as per requirement

• Unable to replicate quality

• Threat of closure with inadequate backup

• Not able to contain prices as per requirement

• No NDA disclosures for proprietary drawings and info

RISKS IN OUTSOURCING


• Delayed deliveries

• Quality not as per requirement

• Unable to replicate quality

• Threat of closure with inadequate backup

• Not able to contain prices as per requirement

RISKS IN DISTRIBUTION


• Inadequate commitment to president products as they might have other priorities

• Also deal with products of competition

• Inadequate field and technical force

RISKS IN TPD ALLIANCES

• Lack of marketing and technical support

• Inappropriate pricing for indian markets

• Untimely withdrawal of support for existing products

• Lack of information related to competitive products or current installed base

• Risk of partner selling out

ethics+ +bus+risk

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